government grant

Gill Gittings

Can someone help me? I have a client who has received a grant to acquire some machinery. My boss has said to offset the grant against its cost but surely this isn't right? I think it should be either profit and loss or a creditor??

Can anyone help?

Steve Collings

Hi Gill,

This would depend on the type of client you are acting for and under which framework the accounts are being prepared.

If the client is a Ltd Co, reporting under FRSSE, then no it cannot be offset against the cost of the machinery. There is a provision buried within FRSSE at paragraph 6.54 that specifically states that companies reporting under UK companies legislation cannot offset the grant against the asset's cost but instead (assuming it is a capital based grant) must recognise the grant as deferred income.

Because the FRSSE (and the Companies Act) refers to incorporated businesses, if your client is unincorporated then seemingly it can offset the grant against cost because the Act specifically says ".....the option to deduct government grants....is not available to companies governed by ........"

If you are preparing accounts under IFRS, then IAS 20 does allow the grant to be offset as the grant will be recognised in the income statement by way of reduced depreciation charges.

Generally, companies reporting under UK GAAP adopting SSAP 4 requirements or FRSSE equivalent simply credit the grant to deferred income in current and/or non currnet liabilities and released to the P&L as the cost of the asset is depreciated.

Hope that helps.

Steve

jilt

Steve, when you say 'If you are preparing accounts under IFRS' and 'companies reporting under UK GAAP' etc what determines how the accounts are prepared? Is it the size of the company, you do not have an option? Sorry, have got my dumb head on

Steve Collings

Hi Jill,

It's not a dumb question!

UK GAAP currently is your FRS's, SSAP's and Task Force Abstracts (UITFs).

If the OP is preparing accounts for an Aim listed client or a PLC, then she will be preparing accounts under IFRS because in the UK such companies must use IFRS to prepare their accounts. Companies that are not Aim listed or a PLC can choose to adopt IFRS if they want, but they would be insane to choose to do so until it becomes a mandatory requirement (i.e. when the IFRS for SMEs comes in in January 2012).

If the OP is preparing accounts for a FRSSE client, then there are thresholds that determine whether a company is eligible to apply FRSSE. FRSSE is the Financial Reporting Standard for Smaller Entities and can be used by companies if it does not exceed more than one of the following criteria:

Turnover £6.5 million
Balance sheet total £3.26 million
Average monthly employees 50

If it does exceed more than one of the above criteria then it cannot apply FRSSE and must apply full FRS/SSAP/UITFs etc.

Eventually the FRSs/SSAP/UITF and (potentially) the FRSSE will be replaced by the IFRS for SMEs (propsal is from 1 January 2012). The Accounting Standards Board are thinking about keeping FRSSE but it will only apply to extremely small companies and may be adapted to conform with IFRS.

Hope that clarifies things for you.

Kind regards,

Steve

jilt

Thank Steve. Wish I'd never asked ............................only joking

Gill Gittings

Thanks sooo much steve. How do you know all this? Your like a walking accountancy text book!!

Its a Ltd co but how would the grant be recognised by reduced depreciation? I didn't get this.

Steve Collings

Gill Gittings wrote: »

Its a Ltd co but how would the grant be recognised by reduced depreciation? I didn't get this.

Because under IAS 20, you would DR cash and CR non-current (fixed) assets so you would be bringing the asset in at a reduced cost price as you will have credited the grant against the asset's initial cost, resulting in reduced depreciation charges hitting the P&L. If you didn't offset the grant against the cost you would charge higher depreciation because the charges would be based on a higher cost price of the asset.

Regards

Steve

deanshepherd

How big is the grant? How big is the company?

If it is immaterial then I would do as your boss suggests and net it off to match the tax treatment (see BIM40451).

Julia Crouch

Hi Gill

Sorry to side track your thread, I posted a similar question a little while ago and did not get a response and since you have Steve's attention thought I would also ask about grants.

In my case the grant is being received by a small limited company £30 a week towards the employment of an apprentice, and from what is written here I presume that I will have to account for this as income and match against the period of employment that the grant relates to, accruing as necessary.


Julia

Gill Gittings

To dean,

It is a large grant because they are in a disadvantaged area. However my boss was thinking along the same lines as he is a tax associate but our tax dept advised against offsetting and said we should comply with accounting standards.

We have since contacted our institute tech helpline who have instructed us to do the same as whar steve suggests.

It hasn't half caused some debte though!

Steve Collings

Julia Crouch wrote: »

Hi Gill

Sorry to side track your thread, I posted a similar question a little while ago and did not get a response and since you have Steve's attention thought I would also ask about grants.

In my case the grant is being received by a small limited company £30 a week towards the employment of an apprentice, and from what is written here I presume that I will have to account for this as income and match against the period of employment that the grant relates to, accruing as necessary.


Julia

Yes as it is a revenue based grant that sounds fine.

Regards,

Steve

mc25

Woww!! Very interesting thread. Def. I have learnt something new today. Cheers all!!